Will May Jobs Report Give Fed Pause?
Has the labor market hit yet another spring "soft patch"? U.S. job growth sputtered in May, according to the government's employment report for the month, released June 2. And the labor market weakness may provide all the ammunition needed for the Federal Reserve to pause in its series of interest rate hikes as Chairman Ben Bernanke convenes the central bank's policy meeting later in June.
The report's headline figure, non-farm payrolls, rose only 75,000 in May, vs. economists' median forecast of a 180,000 gain. Meanwhile, April's measure was revised down to 126,000, from 138,000. March's previous 200,000 gain was revised lower as well, to 175,000, for a total net downward revision of 37,000. These payroll figures are much weaker than expected, and the data from the report have lowered several forecasts for other economic reports coming later in the month.
The reaction of financial markets on June 2 was fairly predictable, with the yield on the benchmark 10-year Treasury note plunging 5 basis points, to 5.05%, after the release as prices advanced. Major stock indexes rose as well. The dollar traded sharply lower.
This weakness in the data from the report's survey of establishments (businesses, government entities, and other institutions) stood in contrast to the household survey, which revealed a job growth surge of 288,000 and left the unemployment rate moving to 4.6% (median 4.7%), from 4.7% in April. The May rate is the lowest since July, 2001.
Apart from the unemployment rate, the rest of the report was fairly lackluster. Average hourly earnings growth slowed to 0.1% from an upwardly revised 0.6% (vs. 0.5%) in April. Hourly earnings rose 0.2% (median 0.2%), leaving the year-over-year rate at 3.5%, from the 4.2% spike in April. Manufacturing employment fell 14,000, with construction up 1,000. Government employment was up 8,000.
The average workweek was 33.8 hours, vs. 33.9 in April. Nevertheless, hours-worked is poised for growth of a still robust 2.1% in the second quarter, though down from 3% in the first. The data are consistent with second-quarter GDP growth in the 3% to 4% range despite the weak signal for the month of May.
The May jobs report signals weakness in industrial production and personal income growth for the month, following robust gains for both over the past five or six months. We at Action Economics expect a flat industrial production figure in May, and a small 0.2% gain in personal income. Both reports are still on a solid trajectory through the second quarter, however, as industrial production is poised for a 5.7% growth rate, following a 5.4% rate in the first quarter and a 5.3% rate in the fourth quarter of last year.
Personal income is slowing more appreciably, as the lean May figures will pull down the quarterly growth rate to the 5%-to-5.5% neighborhood, following a 6% growth rate in the first quarter, and a hurricane-distorted 7.7% rate in the 2005 fourth quarter. Factoring in a weaker-than-expected May factory orders report, also released June 2, we have revised downward our second-quarter GDP forecast to 3.5% growth.
The shortfall in output implied by the report still supports forecasts of respectable economic growth in second quarter. But the heightened real sector uncertainty and lack of new wage inflation pressure gives the Fed more than ample reason to pause.
Wall Street will be watching the inflation reports (producer prices and consumer prices) in the coming weeks for the final clues as to whether the Fed will take a break at its June 29 meeting. Based on the May jobs numbers, it will take a pretty big surprise in the inflation reports now to push back the impending pause in Fed policy.